Liabilities and Equity

Liabilities

Probable Future sacrifices of economic benefits arising from present obligations. Anticipated timing determines classification as current or non-current.

Trade accounts payable

owed for goods/raw materials/supplies. Not evidenced by a promissory note

Current Portion of Long-term debt

Principal due within the next year is classified as a current liability unless such debt is to be refinanced. If so, debtor must intend to refinance, or have the ability to refinance. Ability= is actual refinancing prior to financial statement issuance or existence of a noncancelable financing agreement.

Warranties

Promise to correct product defects or compensate the buyer.

Assurance Warranty

Not a separate performance obligation so no related revenue recognition. Seller repairs the product, substitutes a replacement, or reimburses. Accrued Warranty liability and expense recorded at time of sale to match revenues and expenses.

Service Warranty

Also referred to as extended warranty is a separate performance obligation and revenue recognition. Recognition of liability at time of sale. Warranty revenue recognized over time/as earned.

Stockholders Equity

The ownership interest in a company, calculated as total assets minus total liabilities, representing the claim of shareholders on the company's net assets.

Capital Stock

Legal Capital- Capital that must be retained for the protection of creditors, typically represented by par/stated value. Corporate charter will provide the par value as well as the amount of each class of stock that may legally be issued, also referred to as authorized shares. When shares, or a portion of shares, are issues, these are referred to as issued shared. Of those, shares in the hands of shareholders (not held as treasury stock by corporation)are referred to as outstanding shares.

Common Stock

Basic ownership interest with right to vote and management oversight. Not guaranteed dividends or assets upon dissolution. Right to share earnings and bear ultimate risk of loss.

Preferred Stock

Typically does not have voting rights. May have preferential rights for dividends and in liquidation. Dividends may be: Cumulative or noncumulative. Participating or non participating. Preferred equity that has priority over common stock for dividend payments and asset distribution.

Additional Paid In Capital

Generally represents capital contributions in excess of par/stated value. Can arise from other transactions, including: Sale of treasury stock at gain, liquidating dividends, bond conversion, small stock dividends. It increases by the difference between market value and par value times number of shares

Treasury Stock

Corporation’s own stock- issued- reacquired by the corporation- not retired. Not entitled to vote, receive dividends, etc. Retained earnings may be restricted due to treasury stock presence.

Retained Earnings (Deficit)

Accumulated earnings (losses) during the corporation’s life not paid out as dividends. this is calculated by net income/loss less dividends ± prior period adjustments ± accounting changes reported retrospectively = retained earnings.

Dividends

Pro rata distribution of earnings. Prefered stock: typically a total dividend amount less any preferred dividends.

Key Dates:

1. Date of Declaration: board of director’s approval = the date the board of directors formally approves a dividend. On the declaration date a dividends payable liability is created and retained earnings are reduced.

2. Date of record: date of ownership is determined = the date the board of directors specifies that those who own the stock on this date will receive the dividend.

3. Date of payment: date dividend is paid. = the date on which the corporation pays (paper check or electronic check) the dividend.

Cash Dividend

Distribution of cash

Dividends may be declared on preferred stock or common stock but are not declared on treasury stock. Dividends declared reduce retained earnings.

Property Dividend

distribution of noncash assets. Restate to fair value with gain/losses recognized in income. The dividend liability and the related decrease to retained earnings are recorded at the fair value of the assets to be transferred.

Small stock dividend

less than 20-50 percent of shares outstanding are distributed. Not expected to impact the market price of the stock. Transfers at market value from retained earnings to capital stock and additional paid-in capital. There is no effect on total shareholder’s equity, paid in capital is substituted for retained earnings. The JE would be CR Capital Stock, CR Additional paid in capital, DR retained earnings. Equity doesn’t change because the only thing changing is composition.

Large stock dividend

More than 20-50 percent of shares outstanding are distributed. Expected to reduce the market price. Transfers at par value from retained earnings to capital stock only. The amount transferred is the number of shares issued multiplied by the par (or stated) value of the stock. Hoever, if state law does not require capitalization of retained earnings for stock dividends (which is rare because it requires amendment to the articles o incorporation), record the stock dividend (like stock split) by changing the number of shares outstanding and the par (or stated) value per share.

Stock splits

issues additional shares of its own stock. Reduces par value per share in proportion to shares issued.